The Reputational Costs of Tax Avoidance

Gallemore, John; Maydew, Edward L.; Thornock, Jacob R.

doi:10.1111/1911-3846.12055

Cited by 360 publications

(260 citation statements)

References 63 publications

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“…Dyreng, Hanlon, and Maydew (2008), for instance, provide evidence that firms' effective tax rates (ETRs) differ considerably and a quarter of the firms in their sample persistently pay taxes in excess of the statutory U.S. corporate tax rate. In accounting research, the term "undersheltering puzzle" was coined for this phenomenon (Gallemore, Maydew, and Thornock 2014, Hanlon and Heitzman 2010, Desai and Dharmapala 2006, Weisbach 2002. As the causes of the undersheltering puzzle are yet not entirely clear (Hanlon and Heitzman 2010), we examine whether and under which conditions heuristics lead to biases in tax-planning decisions that result in economically suboptimal decisions.…”

Section: Introductionmentioning

confidence: 99%

“…We acknowledge that tax-minimizing behavior in reality does not necessarily imply economically optimal results. For instance firms differ in their financial reporting costs of tax planning (e.g., Frank, Lynch, andRego 2009, Badertscher, Philips, Pinco, and, regulatory costs of tax planning (e.g., Mills, Nutter, and Schwab 2013), or reputational costs of tax planning (e.g., Gallemore et al 2014) which implies different levels of economically optimal tax planning across firms. We neglect these aspects in our experimental setting to isolate the causal effect of tax-rate and tax-base effects on decision-making.…”

Section: Introductionmentioning

confidence: 99%

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Tax Rate Biases in Tax Planning Decisions: Experimental Evidence

2016

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Tax Rate Biases in Tax Planning Decisions: Experimental Evidence

2016

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“…Consistent with the concern about providing a roadmap for taxing authorities, Abernathy, Davenport, and Rapley (2013) show a negative market reaction to the IRS's initial announcement regarding Schedule UTP, a required annual report detailing FIN 48 information. 7 While Graham et al (2014) document managers' belief of reputational costs related to tax avoidance, empirical evidence has not supported those views (Austin and Wilson 2015;Gallemore, Maydew, and Thornock 2014). 8 It is possible that high ETR firms may be viewed as underinvesting and would therefore want to lower ETR by accruing UTB interest and penalties outside of the tax expense.…”

mentioning

confidence: 99%

Income Statement Reporting Discretion Allowed by FIN 48: Interest and Penalty Expense Classification

Abernathy

Beyer

Gross

et al. 2017

The Journal of the American Taxation Association

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Financial Accounting Standards Board Interpretation No. 48 (FIN 48, FASB 2006) allows discretion regarding the income statement classification of interest and penalty expenses for unrecognized tax benefits (UTBs). We investigate whether tax avoidance, management compensation, and debt agreements affect the expense classification election and whether this discretion has implications for financial statement users. We find firms that engage in tax avoidance activities, measured by effective tax rates (ETRs) and involvement in tax disputes, are more likely to include interest and penalties in tax expense. We also find that interest and penalties are more likely to be classified as tax expense when CEO compensation is more sensitive to pre-tax income. Finally, we find that UTB interest and penalty expense classification is associated with analysts' ETR forecast accuracy, which suggests there is a potential unintended consequence related to decision usefulness of FIN 48 reporting due to expense classification discretion.

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“…The COLI shelter was the subject of unflattering coverage in the media, including the Wall Street Journal, which identified the companies that engaged in COLI alongside pictures of their actual deceased employees. COLI shelters are, therefore, an example of a tax avoidance strategy that many viewed as particularly aggressive and that resulted in adverse scrutiny for firms that engaged in them, see Gallemore et al (2014), p. 1106. 21 The OTSA was established to combat the rise of tax shelters in the late 1990s.…”

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confidence: 99%

The Implications of Book-Tax Differences: A Meta-Analysis

2016

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. http://ftp.zew.de/pub/zew-docs/dp/dp17003.pdf Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar. Terms of use: Documents inDis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. The Implications of Book-Tax Differences: A Meta-AnalysisMaria Theresia Evers*, Ina Meier**, Katharina Nicolay*** November 2016 AbstractOver the last decade, a large body of tax accounting literature on the association between book-tax conformity (BTC)/book-tax differences (BTD) and firms' opportunistic reporting behavior has emerged. Yet, existing empirical evidence on the questions whether increased book-tax conformity actually reduces Earnings Management (EM) and/or Tax Sheltering (TS) and whether book-tax differences are really indicative of such opportunistic reporting behavior is not yet clear. We therefore conduct a meta-analysis aimed at identifying the sources of heterogeneity in primary studies and at providing a consensus estimate with respect to the sign and the statistical significance level for the examined association. Our qualitative literature review reveals that major sources of heterogeneity in the study design include differences in the proxies for EM and TS and in the measures used to determine BTD and BTC. Our meta-regression results show that BTD are indeed indicative of opportunistic reporting behavior, and even more so of EM. These results are, however, weaker for studies that determine BTD only roughly as the difference between book and estimated taxable income instead of using more specific BTD proxies. Moreover, examining actual BTD computed from tax returns instead of only approximating these from financial statements strongly increases the effects. Hence, efforts taken to accurately determine BTD seem to be worth wile when it comes to the explanatory power for opportunistic reporting. Furthermore, our results suggest a negative association between book-tax conformity and EM/TS, which we interpret as an indicator for higher conformity indeed being effective in reducing aggressive reporting.JEL Classificat...

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The Reputational Costs of Tax Avoidance

Cited by 360 publications

References 63 publications

Tax Rate Biases in Tax Planning Decisions: Experimental Evidence

Tax Rate Biases in Tax Planning Decisions: Experimental Evidence

Income Statement Reporting Discretion Allowed by FIN 48: Interest and Penalty Expense Classification

The Implications of Book-Tax Differences: A Meta-Analysis

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